Goo d morning, and thank you for joining us on today's Hovnanian Enterprises Fiscal 2021 fourth quarter earnings conference call. An archive of the webcast will be available after the completion of the call and run for 12 months. This conference is being recorded for broadcast, and all participants are currently in a listen-only mode. Management will make some opening remarks about the fourth quarter results and then open the line for questions. The company is also webcasting a slide presentation along with opening comments from management. The slides are available on the investor page of the company's website at www.khov.com. Those listeners who would like to follow along should now log on to the website. I would like to turn the call over to Jeff O'Keefe, Vice President, Investor Relations. Jeff, please go ahead.
Thank you, Valerie, and thank you all for participating in this morning's call to review the results for our fourth quarter and fiscal year. All statements in this conference call that are not historical facts should be considered as forward-looking statements within the meaning of the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. Such statements involve known and unknown risks, uncertainties and other factors that may cause actual results, performance or achievements of the company to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements. Such forward-looking statements include, but are not limited to, statements related to the company's goals and expectations with respect to its financial results for future financial periods.
Although we believe that our plans, intentions and expectations reflected in or suggested by such forward-looking statements are reasonable, we can give no assurance that such plans, intentions or expectations will be achieved. By their nature, forward-looking statements speak only as of the date they are made, are not guarantees of future performance or results, and are subject to risks, uncertainties and assumptions that are difficult to predict or quantify. Therefore, actual results could differ materially and adversely from those forward-looking statements as a result of a variety of factors. Such risks and uncertainties and other factors are described in detail in the sections entitled Risk Factors and Management's Discussion and Analysis, particularly the portion of MD&A entitled Safe Harbor Statement, in our annual report on Form 10-K for the fiscal year ended October 31, 2020, and subsequent filings with the Securities and Exchange Commission.
Except as otherwise required by applicable securities laws, we have undertaken no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events, changed circumstances, or any other reason. Joining me today on the call are Ara Hovnanian, Chairman, President, and CEO, Larry Sorsby, Executive Vice President and CFO, and Brad O'Connor, Senior Vice President, Chief Accounting Officer and Treasurer. I'll now turn the call over to our CEO. Ara, go ahead.
Thanks, Jeff. I'm going to review our fourth quarter results, and I'll address the current market environment. Larry Sorsby, our CFO, will follow me with more details. I'll make a few closing comments, and we'll open it up to Q&A. On slide five, we compare our results to our most recent guidance. Although we experienced supply chain delays, our amazing associates found ways to mitigate many of the issues. We managed to deliver a large number of quality homes in the final month and days of the quarter without spending the incremental costs that concerned us. This allowed us to achieve higher gross margins than we anticipated. While supply chain issues prevented us from closing more homes, we were able to report revenues above the midpoint of our guidance. During the quarter, we also achieved lower SG&A and lower debt levels, which resulted in lower interest expense.
All of this allowed us to not only exceed our revised guidance, but also our original fourth quarter guidance for gross margin, EBITDA, and pre-tax income. During our second quarter conference call, we talked extensively about the impact of phantom stock expense on our SG&A. During the fourth quarter, our stock price declined, which resulted in a $5 million reduction in phantom stock expense. In the third column of this slide, we show what our results would have been without the benefit of the phantom stock expense reduction. As you can see, we still exceeded our original and revised guidance for EBITDA and pre-tax profit. Further, our SG&A ratio would have been within our guidance without the benefit. Moving on to slide 6, we show year-over-year comparison for our fourth quarter.
Given the supply chain disruptions and labor shortages that have been plaguing many industries, including home building, we are pleased with our strong performance in the quarter. Starting in the upper left-hand portion of the slide, you can see that our total revenues for the fourth quarter increased 19% to $814 million. Moving to the upper right-hand portion of the slide, you can see that our adjusted gross margin increased 260 basis points to 22.8% this year compared to 20.2% in last year's fourth quarter. This clearly illustrates that we've been able to raise home prices more than enough to offset the higher labor and material costs that we've incurred. Keep in mind that these deliveries did not get the benefit of lower lumber prices since they started near peak lumber pricing.
We expect the lower lumber prices to positively impact gross margins beginning in the second quarter of fiscal 2022 as we deliver homes that started after lumber prices receded. In the lower left-hand quadrant of the slide, you can see that our SG&A was 8.6% for the fourth quarter compared to 9.6% in last year's fourth quarter. If you ignore the benefit of the phantom stock expense, it still would have improved to 9.2% this year. In the lower right-hand quadrant of the slide, we show that adjusted EBITDA increased 39% from $87 million in last year's fourth quarter to $121 million this year. On slide 7, you can see that our adjusted pre-tax income improved 80% to $81 million compared to $45 million last year. Turning to slide 8.
For the full year, our earnings per share, ignoring the benefit of the valuation allowance reduction, grew 210% from $7.03 in fiscal 2020 to $21.77 in fiscal 2021. This is a significant year-over-year growth, and we expect to have continued significant improvement in fiscal 2022. We already have the majority of our first 2Q contracts in backlog, about half of our third quarter, and we're beginning to fill our fourth quarter pipeline. Let me talk about the sales environment. On the right-hand portion of slide nine, we show contracts per community for the fourth quarter in each of the last three- years.
You can see that our contract pace jumped from 9.5 in the fourth quarter of fiscal 2019 to a white-hot pace of 16.5 in fiscal 2020. That was a 74% year-over-year increase. For over a year now, we've been saying that the sales pace that we achieved in fiscal 2020 was unsustainable, and that year-over-year comparisons would be challenging. As we had anticipated, with significant home price increases and metered sales, the housing markets returned to a more normalized sales pace in fiscal 2021. Our contracts per community of 10.2 in this year's fourth quarter were below fiscal 2020's white-hot fourth quarter, but up 7% compared to a more normalized fourth quarter in fiscal 2019. Further to the left, we show that the average fourth quarter contract pace from 1997 through 2002 was 10.2.
As we've said many times before, that was a time that was neither a boom nor a bust for the housing industry. While our sales pace in the fourth quarter of 2021 slowed to a more typical historical pace, both home prices and gross margins on homes that we sold in the fourth quarter were much higher this year than they were a year ago. We expect this will lead to higher levels of profitability in future periods as we deliver those homes. On slide 10, we show contracts per community on a monthly basis from December through November. The most recent month is in dark green, the same month a year ago is in light blue, and the same month two years ago is in gray. For the past 7 months, our contracts have been lower than last year's blazing pace.
However, we compare favorably every month with 2019's more historical typical contract pace. We believe our current sales pace is healthy and much more sustainable than the COVID demand surge pace during fiscal 2020. Further, the most recent month of November shows that we're closing the gap on sales pace, notwithstanding significant price and margin increases this year. Our contract dollars in November 2021 actually increased 10% over last year. This is particularly noteworthy as we've raised prices considerably since last November when sales were white-hot. Furthermore, this year's November only had four Sundays compared to five Sundays last year. The housing market definitely continues to remain really solid. On slide 11, we show where our community count was at the end of every quarter since the last fiscal year-end.
As you can see, primarily due to selling through communities at a significantly higher than normal pace, as we discussed before, our community count had been declining each quarter up until the end of the third quarter of 2021, when we had a sequential quarterly increase. As we projected, the positive trend continued during the fourth quarter. We grew by 20 communities to end fiscal 2021 with 140 communities. Not only was this up from the end of the third quarter, but it was also an increase from the end of last year. We expect our community count is likely to experience up and down quarterly fluctuations during fiscal 2022, including a decrease in the first quarter. However, given no material changes in market conditions, we expect to end the year with a community count at or slightly higher than we ended fiscal 2021.
Further, we expect to maintain a higher average community count for fiscal 2022 compared to fiscal 2021. On a daily basis, we all continue to see hot headlines about supply chain disruptions and labor shortages. These problems are not just impacting the home building industry, but they're wreaking havoc on just about every industry across the globe. At this point, we're not seeing any relief on construction cycle times, and we therefore included the current extended cycle times in the guidance that we're gonna give you toward the end of our call. As we have now begun our fiscal year, we have the headwinds of continued supply chain disruptions and a slower sales pace compared to the white-hot levels that we achieved in fiscal 2021.
However, these negative influences should be more than offset by our increased community count, higher gross margins, and higher selling prices, which we expect should allow us to achieve revenue growth and significant profit growth in fiscal 2022. I'll now turn it over to Larry Sorsby, our Chief Financial Officer.
Thanks, Ara. I'm gonna start with the progress we've made in growing our lot position. Turning to slide 12, we show that year-over-year, our lot count increased by almost 5,000 lots or by 19%. We've been steadily increasing our lot position, and we expect to see our lot count continue to rise in fiscal 2022. Based on fiscal 2021 deliveries, this equates to a five-year supply. We believe that the COVID surge and sales demand we experienced in fiscal 2020 and fiscal 2021 was unsustainable. As a result, we conservatively underwrote all new land acquisitions since July of 2020 with pre-COVID contract paces. Additionally, when we underwrote the lots controlled between April and September of 2021, we were using then current construction costs, including lumber costs that were significantly higher than today's cost.
As a result of subsequent declines in lumber prices, we now expect even higher margins on those recently acquired land parcels. The market for land acquisitions remains rational, and we continue to feel very comfortable with all of the acquisitions we've made over the past year. Keep in mind, there's a lag between when we place lots under our control and when those lots will be fully developed, and we can open a community. Most of the land we put under control during our fourth quarter of fiscal 2021 will not be open for sale until fiscal 2023 and beyond. While it's too early to give specific guidance, we do expect to grow our community count in fiscal 2023.
We now control 100% of the land and communities necessary to achieve our expected growth and profits during fiscal 2022 and control roughly 90% of the lots to achieve our expected additional growth in fiscal 2023's profits. Today, our land acquisition teams are focused on obtaining control of land and communities for home deliveries in fiscal 2023 and beyond. Turning now to slide 13. During the fourth quarter of fiscal 2021, our land and land development spend was $167 million, which brought the total spend for the full year to $698 million. That is a 12% increase over the $624 million spent during fiscal 2020. This further demonstrates we're investing the money needed to grow our community count. Turning to slide 14.
Even with that increase in land spend and an early retirement of $181 million of senior secured notes during fiscal 2021, we ended the fourth quarter with $381 million of liquidity, well above the high end of our liquidity target range. We continue to have excess liquidity, and today, our land teams are busy contracting additional land parcels across the country. Turning to slide 15. Compared to our peers, you see that we still have one of the highest percentages of land controlled via options. We continue to use land options whenever possible to achieve high inventory turns, enhance our returns on capital, and to reduce risk. Our use of land options increased from 63% at the end of fiscal 2020 to 66% at the end of fiscal 2021. Turning now to slide 16.
Compared to our peers, you see we continue to have the second highest inventory turnover rate. Our inventory turns were 20% higher than the next highest peer below us. High inventory turns are a key component of our overall strategy. We believe we have opportunities to continue to increase our use of land options and to further improve inventory turns and our returns on inventory in future years. On slide 17, we show the dollar value of backlog, including domestic and unconsolidated joint ventures, increased 17% to $1.9 billion at the end of the fourth quarter. The strength of this backlog, including a solid expected gross margin, sets us up nicely for even stronger financial performance during fiscal 2022.
Our financial guidance for the first quarter, the second quarter, and the full year for fiscal 2022 assumes no adverse changes in current market conditions, including no further deterioration in the supply chain. Further, it excludes any impact to our SG&A expense from phantom stock expenses related solely to stock price movements from the $84.26 stock price at the end of fiscal 2021's fourth quarter. As you review our guidance, keep in mind that we are not a builder who primarily builds spec homes. We already have more than half our full year's projected deliveries and contract backlog, which provides us with an even higher degree of confidence in our projections. On slide 18, we provide guidance for the first quarter of fiscal 2022.
We expect total revenues for the first quarter of fiscal 2022 to be between $640 million and $670 million. We also expect gross margins to be in the range of 20.5%-22% compared to 20.7% in last year's first quarter. SG&A, as a percent of total revenues, is expected to be between 10.8% and 11.8%. Finally, we expect our adjusted pre-tax profit for the first quarter of fiscal 2022 to grow to between $30 million and $35 million, up 40%-63% compared to a $21 million profit in the same period last year. On slide 19, we provide guidance for the second quarter of fiscal 2022.
Due to the significant improvement in expected profits during the first half of 2022, we felt it would be helpful to show two quarters of guidance. However, we do not plan on providing two quarters of guidance in future periods. We expect total revenues for the second quarter to be between $700 million and $750 million. We also expect gross margins to be in the range of 23%-25%, up substantially compared to the 21.3% in last year's second quarter. SG&A, as a percent of total revenues, is expected to be between 9.5% and 10.5%, compared with 11.7% last year.
Finally, we expect our adjusted pre-tax profit for the second quarter of fiscal 2022 to grow to between $60 million-$75 million, up 93%-141% compared to a $31 million profit in the second quarter last year. On the next three slides, I will provide guidance for all of fiscal 2022 that will also show actual results for fiscal 2019, 2020, and 2021 to provide context to how our results have significantly improved over the past three years. Turning now to slide 20. In the upper left-hand portion, we show full year total revenues have increased from $2.02 billion in fiscal 2019 to $2.78 billion in fiscal 2021. For fiscal 2022, we expect to report another increase with total revenues between $2.8 billion and $3 billion.
The last year has been a wild rollercoaster ride for costs, particularly for the cost of lumber. For most of the homes that we will be delivering during the first half of fiscal 2022, not only have we already sold them, but we've already started construction and therefore locked in the cost of lumber. This provides us with strong transparency to the expected improvements in gross margins we're projecting beginning in the second quarter of fiscal 2022. After increasing gross margins to 18.4% in fiscal 2020, our gross margins improved another 240 basis points to 21.8% in 2021. In fiscal 2022, we expect to increase margins to between 23.5% and 25.5%, up another 170 to 370 basis points compared to fiscal 2021.
On the bottom of this slide, we show that our SG&A as a percentage of total revenues has declined steadily since fiscal 2019's 11.6% to 9.9% in fiscal 2021. For fiscal 2022, we expect SG&A as a percentage of total revenues to be between 9.3% and 10.3%. In the bottom left-hand quadrant, you can see that adjusted EBITDA grew from $174 million in fiscal 2019 to $364 million in fiscal 2021. We show in fiscal 2020, we achieved a 35% growth in adjusted EBITDA. In fiscal 2021, we grew adjusted EBITDA another 55%. Based on the midpoint of our adjusted EBITDA guidance, we expect to achieve an additional 19% growth in EBITDA in fiscal 2022.
These increases are representative of the progress we've made in materially improving our operating results. Turning now to slide 21. We show adjusted pre-tax profit on the left half of the slide. After increasing adjusted pre-tax profits by 288% in fiscal 2021, we expect our adjusted pre-tax profit for fiscal 2022 to grow between $260 million and $310 million, up 32%-57% compared to fiscal 2021. On the right-hand portion of the slide, we show earnings per share for the past 3 years. Assuming a 30% tax rate, similar to what we saw in the fourth quarter of fiscal 2021, our EPS for fiscal 2022 is expected to be between $26.50 and $32 per share.
Based on yesterday's closing stock price of $107.55, we're currently trading at 4.9 times our trailing four quarters EPS and 3.7 times the midpoint of our earnings guidance for fiscal 2022. Turning now to slide 22. On this slide, we show our debt maturity ladder at the end of the fourth quarter. On July 31, we paid off in full, 1 year early, $111 million of our 10% senior secured notes due July 2022 at par. On August 2, we paid off in full, 3 years early, $70 million of our 10.5% secured notes due July 2024 at a call price of 102 5/8.
We believe that we should be able to refinance our currently undrawn revolving credit facility ahead of its maturity in the first quarter of fiscal 2023. After that, we do not have any debt coming due until fiscal 2026. Given our $426 million deferred tax asset, we will not have to pay federal income taxes on approximately $1.6 billion of future pre-tax earnings. This tax benefit will significantly enhance our cash flow in years to come and will accelerate our progress in rapidly improving our balance sheet. On slide 23, you can see how our key credit metrics have significantly improved over the past few years, as well as the further improvement we expect to achieve at the midpoint of our guidance for fiscal 2022.
Total debt to adjusted EBITDA has declined from 9.7 times in fiscal 2019 to 3.8 times in 2021 and to 3.2 times projected for fiscal 2022. Net debt to adjusted EBITDA declined from 8.9 times in fiscal 2019 to 3.1 times in fiscal 2021, and to 2.6 times projected for fiscal 2022. Adjusted EBITDA to interest incurred coverage has more than doubled from 1 x in fiscal 2019 to 2.3x for fiscal 2021, and up to 2.8x projected for fiscal 2022. Turning to slide 24. Assuming we hit the midpoint of our fiscal 2022 guidance for pre-tax profit, our shareholder equity is expected to more than double from fiscal 2021's fiscal year-end level. As of yesterday's closing stock price, we're trading at 1.9x fiscal 2022's ending book value.
This improvement in our equity position will result in our net debt-to-capital ratio continuing to decline from 146% at year-end fiscal 2019 to 87% at the end of fiscal 2021. At the midpoint of our guidance, it is projected to reduce further to 76% by the end of fiscal 2022. We expect to continue improving our balance sheet by reducing debt and growing equity. Our goal is to achieve a mid-30% net debt-to-capital ratio. We expect to continue our trend of improving our key credit metrics in future periods. As we continue to post strong results, we believe we should be able to refinance our debt structure at markedly lower rates and better terms in the near future. As always, we will analyze and evaluate our capital structure and explore transactions to further strengthen our balance sheet and our financial performance.
Lastly, we are pleased to announce our board of directors approved reinstating a $2.7 million dividend payment on our preferred stock payable in January 2022. I'll now turn it back to Ara for closing comments.
Thanks, Larry. Slide 25. Looking beyond fiscal 2022, which we recognize is a particularly strong year, we're preparing for improving our performance in a more normalized housing market. We continue to plan to deleverage our balance sheet and refinance our capital structure with much more favorable terms than we are able to achieve in a difficult period. This should lead to very significant interest savings in the future, helping our performance in a more normalized market. Strategically, we plan to grow the percentage of lots under option further and increase our inventory turnover further. In short, we plan to do more with less. We believe this is gonna lead to higher returns on inventory, and that should be the case even in a more normalized market. With our improved balance sheet and focus on greater inventory turnover, we plan to increase our community count.
Finally, with all of the above, we plan to continue to operate at higher volumes and grow, allowing us to leverage our SG&A. We have an operating team that is hitting on all cylinders and is poised to go further. We see a path to return to industry-leading performance and growth and look forward to sharing our results in the near future. That concludes our formal comments, and we'll be happy to turn it over to Q&A.
Thank you. Ladies and gentlemen, if you'd like to ask a question, please press star then one on your touchtone telephone. Again, if you would like to ask a question, please press star then one. Our first question comes from Alan Ratner of Zelman & Associates. Your line is open.
Hey, guys. Good morning. Nice quarter and nice job exceeding the revised guidance there. I guess first question on that point, you know, I'm curious if you could maybe just talk through, you know, some examples of things that you and your team were able to accomplish in October that resulted in the performance coming in ahead of, you know, what you, I guess, feared at that point was a worsening supply chain environment?
Sure. You know, as you know, obviously, the supply chain environment was just really tenuous in terms of making the huge number of deliveries. We literally had our teams shipping components from one market to another, whether it was garage doors or lights or a variety of factors to make that quarter's deliveries. It was right up until the last week or so before we had any real guidance as to whether or not we could make it. Very difficult conditions. The good news is that we made the midpoint of our guidance in deliveries and did better in all the other factors for the reasons we mentioned, including the fact that we didn't spend as much as we thought we would need to to beat the supply chain problems.
Got it. No, that's great, and appreciate the color there. Second, you know, would love to dig in a little bit to the gross margin guidance for next year. You know, obviously, it's a very strong pricing environment, and you know, when I look at your guidance, it obviously implies a pretty sharp ramp in margins in the back half of next year. Larry, I know you kinda walked through the backlog and the fact that you already have some deliveries, you know, third quarter deliveries in backlog. It would seem like that's gonna be, you know, predominantly driven on homes you're selling, you know, in the upcoming months here.
You mentioned lower lumber, which is obviously a benefit for a period of time, but lumber has, you know, the futures have doubled off of those recent lows in August. I'm curious, you know, when does that move higher begin to show up in the margin? Is that reflected in the back half margin, and you're just more than able to offset that? Is that something we should think about heading into 2023 at this point? Just trying to think through the moving pieces on margin because, you know, obviously, that's gonna dictate whether you hit those numbers or not, is the back half performance.
Alan, well, the first thing I'd say is that, you know, we have, as I mentioned in my formal comments, we really have virtually all of our homes expected to close in the first two quarters, not only already in contract backlog, but we know what our costs are because those homes almost every one of them has already started. We're very confident in the increasing margins that we're projecting in the second quarter. Then as we look forward, we have quite a few homes in the third quarter and a smattering of the fourth quarter already sold as well.
We know what our costs are and what our home prices are there, and we've taken into account our expectations and our margin projections for the full year. We're still very confident that without any further deterioration in market conditions, including cost, we're confident in those margin projections that we're providing for the full year.
Alan, I will add, we do have 30- to 90-day locks on our lumber. We've used the current lumber pricing, and that's protected for almost a quarter's worth of starts. Again, while we know we have some exposure for the fourth quarter, we also have pricing opportunities. I can just tell you, the market just feels really strong regarding pricing opportunities. We're comfortable. There's always risk, and that's why we were conservative last year. Hopefully we've been sufficiently conservative to deliver some great results this coming year.
Great. Thanks a lot, guys. Appreciate the color.
Mm-hmm.
Thank you. Our next question comes from Alex Barron of Housing Research. Your line is open.
Yeah. Thank you, and congrats on the improved performance this whole year. I just wanted to verify if I heard you right, that the expected guidance of gross margin for the full year was 23.5%-25.5%?
That's correct.
Okay, great. Obviously, that suggests a pretty nice growth margin improvement in the back half. I guess, you know, my question is, at this point, do you feel that those types of margins in the back half, you know, how many years of land, like, do you guys still have at pre-COVID type pricing? Like, does it cover through 2023?
Well, we mentioned specifically we have five years. At last year's number of deliveries, we've got five years of deliveries locked in land. We didn't comment specifically on what pricing, but you know, last year we had a big chunk of 2023's deliveries already locked. We're feeling reasonably good. I do wanna add that we generally pre-sell most of our homes. The homes that we delivered in the fourth quarter were sold before that, a quarter or two quarters plus before that. Those were at lower prices. Our prices have been going up quite a bit. That's what gives us part of the confidence regarding our future gross margins. Secondly, the homes we just delivered were at peak lumber pricing.
The homes that we've been starting over the last couple of quarters have been at much better prices regarding lumber. Price, home prices are going up, costs, at least lumber costs, have been going down, and that's what's driving our gross margins to increase from where we've been.
Okay. How about on the first quarter, the low end of that margin guidance? If you're saying the peak lumber costs already happened and we're still seeing higher prices, so what's driving that drop?
First quarter homes, the deliveries were started two quarters before that. Those still had higher lumber costs. As we mentioned in the call, it's not until the second quarter deliveries, where those homes were started at lower lumber prices, where you'll start to see the juicier margin, so to speak.
Got it. Okay, great. On the phantom stock up and down adjustment, I thought that ended in 2021. Am I wrong? Does it go through 2022 as well?
Can you repeat the question?
The adjustments you make to the SG&A due to the phantom stock, do those adjustments continue into fiscal 2022 as well every quarter?
Yeah. Yes. What happens is, until the phantom stock has been paid out, which 60% of that phantom stock plan will be paid out in January, and then a year later, another 20%, and then a year after that, another 20%. It'll be a declining impact on SG&A from any stock price movements, but it's still there until it's actually paid out. The first payout, I think, is mid-January 2022.
Okay, great. If I could ask one more. You guys haven't, you know, you've been reporting a lot of orders for this KSA component, but no delivery. When are those units gonna start delivering?
We expect. Well, first of all, it's an interesting environment in Saudi, and the sales have been exceptional. We've got a huge backlog. Not only backlog, but the customers in that market make big stage payments. We've received, our venture has received much of the cash for a lot of our backlog already. We are waiting until final occupancy, which has some administrative hurdles in Saudi for that to occur. We're making great progress. We anticipate that's gonna be happening in the next few quarters, but we're waiting on that. Nonetheless, it's not a hugely material number. We're doing very well there and returns on inventory are great, but it's not a big needle mover in terms of our overall performance.
Okay, thanks. I'll get back in the queue.
Okay.
Thank you. Our next question comes from Jordan Hymowitz of Philadelphia Financial. Your line is open.
Thanks, guys. Let me just first follow up with Alex's question on Saudi. I mean, most people probably don't know, but Saudi is having a giant mortgage boom. The government's subsidizing mortgages heavily. Home building is a big part of the 2030 plan. I mean, even though it's not a needle mover now, the visibility and uptick on Saudi homeownership rate is ginormous. Could that be expanded? Are there limits? I mean, can you talk a little bit more about what that could be in four or five years?
Sure. We think it's a huge market. We think there is a lot of opportunity there. As we said, we've done very well. We've got a lot of experience, and we think we're really well poised to be in the center of that recovery. They have a big baby boom generation in that market. The government has been helping the homebuyers with mortgage costs. Housing for their middle class is a big priority in the kingdom. Again, we think there's a lot of upside and future opportunity for us there.
Okay. Back to domestic stuff. Do your numbers assume any global refinance going on?
Not at-
No, our projections don't assume any refinance of our debt, though we certainly continue to monitor the market carefully. We believe in the not too distant future we should be able to convince bond investors to refinance our debt structure at materially lower rates than we're currently paying. None of that's been done though.
You're paying an average of over 10% on over $1 billion, and the rate would seem to be sub 7 today, or at least close to 7. That could be material savings that's not built into your guidance, correct?
Correct.
I agree.
Okay. Final question is, because you're not paying any taxes for the foreseeable future, book value grows with the pre-tax number, right? Not the diluted EPS number, which I think is closer to $40. Again, that's even before the debt savings, correct? Is that the way to think about it?
Brad.
Brad.
Brad, I'm sorry, I missed the specific question. Are you asking on a cash basis EPS? Is that what you said?
Well, I mean, you're gonna report book value per share, but isn't book value, since you're not paying taxes, you know, shouldn't you add back the tax effect of the DTA to be comparable? You see what I'm saying? Because you're not paying any taxes, so if book value is a measure of liquidation, you're gonna earn next year closer to $40, not $26-$32 by your guidance.
On a cash basis, that's correct, but the DTA is on our balance sheet as an asset.
I don't disagree with that.
Yeah.
Book value will grow faster.
Yeah.
You see what I'm saying?
Yes. That's correct.
Okay. Thank you.
Thank you. Again, ladies and gentlemen, if you'd like to ask a question, please press star then one on your touchtone telephone. Our next question comes from Kwaku Abrokwah of Goldman Sachs. Your line is open.
Thank you so much, and congrats. Congratulations, guys. My questions were mostly answered, but so I'll just follow on as to sort of what is your anticipated timing of the refi of the revolver?
Yeah. We don't have a specific date in mind. Obviously, it comes due, I think, December of 2022, so sometime this year. Yeah, December of 2022. So sometime this year we'll address that. Given that it's the tippy top of our capital structure, it's the least of my concerns on being able to refinance that at this point.
Thank you so much for that. Just as a follow-up on that, is the refi of the capital structure, the refi of the 2026 maturity wall contingent on refi-ing the revolver at all or are those two very distinct issues?
I think they're two separate issues.
Appreciate it. Thank you so much, and congrats.
Thank you.
Thank you.
Thank you. Our next question comes from Alex Barron of Housing Research. Sir, your line is open.
for taking my follow-ups. So I've noticed in your slides that the November orders were down 5% year-over-year, which is a very solid improvement versus the last couple quarters. Is that indicative that you guys are not, you know, holding back sales as much anymore, that things are kinda caught up a little bit more, or how should we interpret that? Also, is that number roughly across all the markets or how does that play out?
Well, first, I'll reiterate that we're actually up 10% in dollars, but we do continue to meter sales in many of our communities. You know, construction is pacing on a metered way in many of our communities, and we're metering sales to match that.
Yeah. I think the short version, Alex, is the market continues to remain very strong, and demand for new homes remains strong. It's not at the white-hot pace that we saw in the fourth quarter a year ago on a per community basis, but demand remains very strong across really all of our markets.
Right. I mean, I guess if we look at last year, it would seem like the only tough comp you guys have ahead is, two months from now. I guess that would be January.
I think the market slowed to a more rational pace starting in May last year, calendar month of May. The spring selling season, I would still say was pretty hot from the COVID surge. That, you know, pace per community began to slow to more rational pace in May.
Right. Now, you guys made a comment that you don't build so many specs, I guess, compared to other builders. You know, even many companies that traditionally didn't build specs have kind of switched in the current supply chain issue environment to building more specs. I'm just kind of curious if you guys can comment on your strategy. Have you guys adjusted your strategy, or is that something that's in process, or you're just gonna continue the way you always have? Can you elaborate on the decision?
We haven't really changed our strategy. We have about $2 billion of backlog, so we are focused on starting those homes. We do build some specs, but it's not the predominant part of our strategy. At the current time, we're not planning on shifting that.
Got it. If I could ask one more on the refinance issue. Is the only thing that is holding that up basically that you guys are waiting to get the rate you're trying to get? Is that the only main thing, or is there anything else?
No, that's the primary issue is, I mean, our current capital structure is pretty unusual and many of the slices of maturities, you know, don't have a lot of liquidity to them. They're small in size, so they're just not actively traded. We have been educating bond investors about our improved performance and educating the rating agencies about our improved performance. As the market recognizes our improved performance and is willing to give us rates closer to what similarly situated home building peers have gotten, we'll pull the trigger. We don't have a gun at our head because we really don't have any material amount of debt coming due till 2026.
We can afford to wait, but we think we've made good progress in that educational process that I just described. We're optimistic that we'll be able to do something in the not too distant future.
I will add, we do have a substantial reduction in our call premiums in February. That certainly plays into our thinking.
Now, you know, I appreciate everything you're saying, and you guys obviously have made a lot of progress. Does this have to be like all or nothing or could it be done in stages or is there something that prevents that? In other words, can you just take one issue out at a time?
There's nothing structurally that would prevent us from that other than size. You know, some of our current issues are pretty small, so I don't think you could do it an issue at a time. You still could do it a chunk at a time, to get to a liquidity size, call it $400 million ± that the market probably would want to see, to really have strong liquidity in a new issue. We wouldn't have to do everything all at once. We could do it in steps, but I don't think we could do it, you know, each individual issue that we currently have couldn't be refinanced easily.
Got it. Lastly, I know last year or this year, or fiscal 2021, you guys reversed most of your DTA, but there was some portion that was not reversed. Is there any update on when that might get fully reversed?
Brad?
It's likely that that won't get fully reversed. The reason that's still reserved is that state NOLs in states that we don't have a lot of operations remaining. For example, Pennsylvania or Illinois. At the current time, we don't anticipate being able to use those, and that's why they're still reserved. If that changes, and at some point we can anticipate generating profits in those states, we would be able to reverse it. At the moment, we don't anticipate that occurring.
Got it.
Once the time runs out for those NOLs, both the asset and the reserve would just be written off.
Having no net effect on our books.
Right.
-because those are reserved. Yeah.
Right. Understood. Okay. Very well. Congrats and best of luck for this year. Thank you.
Thank you.
Thank you, Alex.
Thank you. Our next question comes from Vincent Foley of Barclays. Your line is open.
Morning, guys. Thanks for taking my questions. A couple more on the balance sheet. Larry, I think you talked a little bit about looking for the right rate to do a refinance and something similar to your peers. Should we read that to mean that a secured debt issuance is not what you're looking to do here, which would clearly come with a much lower cost of capital, and it's your intent to take the capital structure and make it essentially all unencumbered?
Vincent, I don't think we have any hard and fast line that would say we wouldn't do a secured deal if that was the most advantageous way to proceed. We think we deserve to be able to refinance on an unsecured basis. It may take two steps rather than one step to accomplish that. We're not ruling out doing a secured refinance, but at the same time, we think our credit statistics warrant our ability to do it on an unsecured basis. We'll just see what the market will accept.
That was helpful. Secondly, I think it's on page 24 of the deck, you talked about a mid-30% net debt to cap target, which is clearly optimistic given where you are right now. Can you kind of walk us through what sort of a timeframe we should think about here? You know, how do you get there? Is this strictly through growth in your equity? You know, how should we think about like a longer-term targets for absolute debt balance here?
Well, since you're looking at that slide, you know, we took it from 146% to 86% in a couple of years. That's a pretty significant improvement, and we're projecting to get to 75%. You know, we really cut it in half in just a few short years. I don't think it's gonna take forever for us to get to a mid-30% debt-to-cap. Although it's not next year and maybe not a year after that kind of thing, it isn't five or 10 years from now that we're talking about it. It's nearer term than that. We don't have a specific timeframe.
We're gonna do it through a combination of continuing to grow earnings and which will enhance our book value and combine that with continuing to reduce debt. Those two things together are powerful tools on improving our balance sheet and getting us closer and closer to that mid-30% debt to cap goal.
As I think was discussed during the call, our cash flow is better than our reported net income because of the NOL. That really enhances our opportunity to reduce debt more than the growth in book value coming up might imply.
Thank you. I certainly didn't mean to imply that it wasn't impressive. Certainly going from 150% to where you're gonna be next year was pretty amazing. Two more for me. As part of any potential refinancing transaction, any consideration to doing an equity raise alongside?
Well, at the current time, you know, we're not contemplating that. We always look at everything, but we're pretty optimistic about our earnings outlook. We think our stock is selling at a pretty low multiple of this year's earnings, let alone the earnings power with a more improved balance sheet and financial foundation. At this point, while we always consider everything, that's not on our front burner.
Okay. Last one for me. Your rationale behind starting to pay a preferred dividend again, and why not use some of that cash to deleverage even further?
I would answer it this way, and that is that you know, although covenants for the last 15 years or so have prevented us from paying that preferred dividend, so we had no choice in the matter, we were prohibited from paying it, and it was a non-cumulative preferred. I think we had a moral obligation, once covenants no longer prevented us from paying it, to actually reinstate it. Once we were able to you know see that our credit statistics had improved, that would allow us without violating any covenants to pay it, and we can look forward and say that we're gonna continue to have strong performance.
You know, we're just the type of company that you know, we issued that preferred debt and promised to pay it, and we're gonna honor our obligations even if we may not have been absolutely legally required to do it. We still think that we were morally obligated and happy to reinstate that dividend for our preferred holders.
Okay. Thank you for your time.
Thank you. Our next question comes from Jordan Hymowitz of Philadelphia Financial. Your line is open.
Thanks. Two quick follow-ups. One, I wanna follow up on the last gentleman's question, 'cause I actually think by putting that cumulative preferred, I think it substantially improves your ability to issue debt at a much lower cost, because I think it ensures the integrity that you guys have. I mean, it ensures that a bond investor knows that even if things get tough, you guys are not gonna try and you know, not honor your obligation. So I compliment you dramatically on that, on the ethics of it. The second thing is on the preferred. You know, a preferred today has a much lower coupon than 7.5%. Is that ever callable though at par? Or hypothetically, might that continue to trade up through par because the comps are trading at much lower yields?
You know, the real honest answer to that is I just haven't thought about it or looked into it. So I don't have a great answer for you in terms of what the preferred might trade at. We just reinstated it, and we just haven't spent any time thinking about that aspect at this point.
Is it callable?
I don't know the answer. Brad, do you?
I don't know off the top of my head.
Yeah. We'll certainly look into it. We just haven't been focusing on the preferred. Unlike all the rest of our debt, we could tell you off the top of our head the answer to most questions on the preferred. We would be happy to get back with you, Jordan, the real answer.
Fine. Just to make sure I'm doing my numbers right, if your guidance is $26-$32 next year, but if you tax effect that, you know, that adds another 25% on top of that. Then if you hypothetically did a 7% versus a 10%+ debt refinance in February, you'd be earning more for $40 per share in cash earnings next year. Is that generally accurate?
Brad, do you wanna tackle that one?
I mean, I can't check your math that quickly, but what you're trying to do directionally sounds correct.
Okay. I mean, at 3x earnings, it's definitely the cheapest home builder in the group, and book value grows very quickly.
I don't think there's any other home builders that grow as rapidly their book as we've been growing our book. I just don't think the market's fully appreciated that, nor do I think certain analysts have appreciated that.
We certainly agree, and that's part of why we answered the question regarding any potential equity offering. You know, we think we're still a really good value.
Last thing. Is there any rating agencies evaluating their ratings at this point? I mean, who knows what they're gonna do, but given the improved cash flows, when is the next time that someone's looking? Because if there'd be a rating upgrade, it would clearly help the ability to raise capital as well.
That's a great point, and we certainly plan to have conversations with both rating agencies in the very near future, as we promised them previously we would after we reported earnings.
Okay. Thank you.
Thank you. Our next question comes from Kwaku Abrokwah of Goldman Sachs. Your line is open.
Yes, this is just two follow-ups. A quick question on your attempt to refi. What is the biggest pushback beyond the rate that you get? Is it, you know, your attempt to educate, you know, new investors on utilizing debt to EBITDA or some of the newer metrics, almost like the, you know, EBITDA metrics versus the more traditional metrics of, you know, net debt to capitalization? Which is high, but as you said, you're gonna. You know, it's gonna come down over time as you accrue value. You know, what are the biggest pushbacks you are getting in terms of the investor education?
I don't think we're really getting pushbacks. I think it's more a rate issue. I think that we could've refinanced our debt, you know, two quarters ago. We just haven't liked the rate that the market is telegraphing that they would do, but it continues to get better. I'm optimistic we'll be able to refinance.
Yeah. As we mentioned, call premiums drop substantially in the coming months. We are eager to show the performance, and we feel very good about our upcoming performance, let alone this quarter's performance. We think all of that will play nicely to our opportunities for refinancing.
Perfect. Just, you know, one last follow-up on the preferred dividends. Does the covenants also apply to your common stock? You know, can you institute a common stock dividend at this time, given the covenants?
Yeah. Let me answer it this way. In the history of the company, as a public company, we've never issued a preferred dividend. We went public in the early 1980s. It's just never been part of our strategy. I do not believe there's anything that would prevent us from deciding to issue a dividend on our common stock. I would say it's a safe bet until we have a much stronger balance sheet, that we have no intention of declaring a dividend on our common stock.
Perfect. Thank you so much, guys. I'm sorry, go ahead.
No, I was just going to add that, you know, we do want to deliver, and that's very high, plus we're earning very high returns on equity. Dollars remaining in the company, you know, that are reinvested in the company, we're earning some good returns on that. That's part of the reason for not focusing on dividends to common right now.
Thank you so much. Take care.
Thank you. I'm showing no further questions at this time. I would like to turn the call back over to Ara Hovnanian for any closing remarks.
Thank you very much. As we said, we're pleased with our results, but we're even more excited about the quarters to come in fiscal 2022, and we'll look forward to reporting them. Thanks so much.
This concludes the conference call for today. Thank you all for participating, and have a nice day. All parties may disconnect.